Non-Profit

Introduction

As someone involved with a charitable cause, you might be weighing the benefits of formally organizing your non-profit. Sure, it will take a little extra work, but only with a state-recognized non-profit corporation can you obtain private and public grants, low-cost postage rates and be exempt from income, sales and property taxes. Most importantly, only a formal non-profit corporation allows individuals to donate money to you tax-free, while shielding you and your personal assets from liability. 

Certified Documents Solutions provides you with the general information you need when thinking about organizing a non-profit corporation. We cover background information, such as how to obtain IRS tax exemption, and provide information on how to operate your non-profit corporation on a continuing basis. In addition, we provide answers to many of the most common questions people have when thinking about forming a non-profit corporation. 

If you decide to take that next step and form your non-profit corporation, we will prepare all of the legal documents you need, file the formation documents with the Secretary of State, and even prepare the 501(c)(3) application at your option.

 

What is a Non-profit corporation? 

A non-profit corporation is a special type of corporation that has been organized specific tax-exempt purposes. To qualify for non-profit status, your corporation must be formed to benefit (1) the public, (2) a specific group of individuals, or (3) the membership of the nonprofit. Examples of non-profits include religious organizations, charitable organizations, political organizations, credit unions and membership clubs (such as the Elk's Club or a country club). 

Non-profit corporations enjoy the same limited liability protection that regular corporations and limited liability companies enjoy. In other words, your directors, trustees, members, and employees are not responsible for the debts and liabilities of the corporation. There are also significant federal and state tax benefits available for incorporating as a non-profit. But one of the most attractive benefits of having a non-profit is that you are allowed to receive grants from the federal government and private foundations. 

It's important to note that simply forming a non-profit corporation does not automatically qualify you for federal and state tax exemption. Instead, it's only the first step. Only a validly organized non-profit corporation can take that second step and apply for federal and state tax exemption. This application is often referred to as the 501(c)(3) application, since that is the most common IRS code section applicable to non-profit organizations. In fact, there are more than 20 code sections where a non-profit can qualify, with the most important being 501(c)(7) for social and recreational clubs. 

A non-profit corporation does NOT mean that the corporation cannot sell goods or services for money. In fact, many non-profits make money from selling everything from clothing to medical services. A non-profit can pay salaries to its officers and employees, but it cannot distribute any profits for the benefit of its directors, officers or members – for example, in the form of a dividend.

 

Directors and Officers of the Non-Profit Corporation 

Directors are responsible for the management and operations of a nonprofit corporation. Nonprofit directors can serve with or without compensation. If you decide to compensate directors, remember that compensation must be deemed "reasonable" by the IRS. Directors are under the same constraints of duty and care for a nonprofit corporation as they are for a "profit" corporation. 

Most states require three (3) directors. Some states require only one, including:

California
Colorado
Delaware
Georgia
Iowa
Kansas

Michigan
Mississippi
Nevada
New Hampshire
North Carolina
Oklahoma

Oregon
Pennsylvania

Virginia
Washington

However, when submitting a 501(c)(3) application or other type of tax exempt application, keep in mind that the IRS generally likes to see an independent, financially disinterested board - which is why the IRS usually requires at least three (3) distinct individuals to serve on the board of directors. It also helps if the directors are experienced in non-profit or business affairs. But don't worry if you initially only have one (1) director. You'll have an opportunity to select additional directors at a later time. 

The officers of a non-profit corporation run the day-to-day activities. Every non-profit corporation must have a President, Treasurer and Secretary. Please note that in some states, one person may hold every office. In others, one person may hold up to two offices, but cannot be both the President and the Secretary. The states where one person may hold every office are:

Arkansas
Delaware
Florida
Georgia
Iowa
Illinois
Hawaii
Kansas
Kentucky
Massachusetts

Maine
Michigan
Minnesota
Missouri
Mississippi
New Hampshire
New Jersey
Nevada
North Carolina
Ohio

Oklahoma
Oregon
Pennsylvania
South Carolina
Texas
Utah
Virginia
Wyoming

 

Members and Membership

Unlike a regular corporation, a non-profit corporation does not have stockholders (since non-profit corporations do not issue stock). Instead, as an option, non-profit corporations may choose to have members. 

A formal membership structure will often grant members certain basic rights, such as the power to vote for directors and the right to approve a sale or merger. Most non-profits (especially smaller ones) do not to have members, due to the additional paperwork and formalities that are required. 

Even without members, other people may still participate as an advisor, patron or contributor, but without a formal vote. However, if your non-profit is a club or social organization, it might make sense that all of the members have a formal vote on certain important matters.

 

The 501(c)3 Tax Exemption

Section 501(c)3 of the IRS Code exempts payment of federal income taxes for groups who are organized for charitable, religious, scientific, literary and educational purposes. It is one of many sections in the IRS code which grants tax exemption to certain entities, but the most common one. Section 501(C)(3) covers organizations formed for the following:

1.     Charitable purposes are defined as "providing services beneficial to the public interest." Examples include a battered women's shelter or a low-cost medical clinic.

2.     Religious purposes are valid as long as the organization's directors, officers and members appears to truly and sincerely hold the values and beliefs espoused by the religion.

3.     Scientific purposes are defined as individuals and groups who conduct scientific research for the benefit of the public.

4.     Literary and educational purposes include instruction of the public on topics for which there are sufficient facts to permit an individual or the public to form an independent opinion or conclusion. An unsupported opinion is not considered educational.

As previously noted, unless a non-profit corporation files a 501(c)(3) application with the IRS, it will not be exempt from paying federal income taxes. If your non-profit's purpose qualifies under 501(c)(3), then Certified Document Solutions can help prepare the application for you. The state also requires a tax exempt application. However, most states will accept the federal application for tax exempt status in place of their own application 

If you do not qualify under 501(c)(3), do not be concerned, because you may be eligible for tax-exempt status under a different IRS code section. Some of the other common ones include:

Labor and Agricultural organizations: 501(c)(5) 
Business leagues: 501(c)(6) 
Social and recreational clubs: 501(c)(7) 
Fraternal benefit societies: 501(c)(8) 
Credit Unions: 501(c)(14) 
Farmer's Cooperatives: 501(c)(16) and 521(a) 


You can certainly prepare the 501(c)(3) application on your own, but it can be tedious and time-consuming. The IRS estimates that it takes a first-time 501(c)(3) applicant in excess of 30 hours to complete the paperwork. 

It will take the IRS 3-5 months to examine and approve your 501(c)(3) application. Keep in mind that a 501(c)(3) application is randomly assigned to an IRS agent for examination, and each agent has a different work load, so processing times will vary. Accordingly, we suggest that you get a jump start on the process by forming your corporation BEFORE completing the 501(c)3 application. While we are filing your incorporation documents, you can use the time to select your board members, prepare your financial budget and refine your activities and programs.

 

Operating a Non-Profit Corporation

Below are some of the most common issues relating to the operating a non-profit corporation.

1.     Keep things separate 

It's important to keep the affairs of your non-profit corporation separate from the personal affairs of the directors and officers. This means setting up a separate bank account, maintaining separate records, and keeping separate books for accounting purposes.

2.     Director Meetings

Like a regular business corporation, directors need to hold periodic meetings. Meetings can take place in person or by telephone. Either way, be sure to make a written record of the items discussed and actions approved at the meetings. Alternatively, you can just get all the directors (or a majority of the stockholders) to sign a statement approving corporate actions.

3.     Tax Returns

Even non-profit corporations that are exempt from federal and state income taxes sometimes must file an information tax return. Federal income is reported on IRS Form 990 and must be filed by April 15 if your corporation's fiscal year ends on December 31. If you operate certain public charities where your gross receipts are less than $25,000 per year, you may be exempt from filing a return. The IRS will inform you if you qualify for the exemption.

4.     EIN and Licenses

Every corporation must obtain a federal tax identification number, which is similar to an individual's social security number. Some states also require a separate state tax number. In addition, county and city business licenses may be required. Please check with your city and county to see which types of licenses you need.

Checklist for New Non-Profit Corporations 

Incorporating your non-profit and obtaining tax-exempt status is just one of many steps required for starting a new non-profit organization. The following is a list of things to do or think about when starting a new non-profit corporation.

  • Establish a corporate banking account.
  • Contact the state tax board for information about obtaining a state tax number and see if additional information must be submitted for state tax exemption.
  • Check with the state department of consumer affairs or business licensing to obtain any required business licenses or permits.
  • Contact the state Attorney General's Office to see if registration or reporting is required.
  • Find out about workers' compensation if you will have employees.
  • Protect your trade name
  • Order any required notices (advertisements you have to place) of your intent to begin operating in the community.
  • Check zoning laws.
  • Obtain city and/or county business licenses or permits.
  • Get adequate insurance or a rider to a homeowner's policy.
  • Get tax information for employees, including guidelines for withholding taxes, information on hiring independent contractors, etc.
  • Apply for a federal non-profit mailing permit.
  • Order business cards and stationery.
  • Get an email address.
  • Set up your website.

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Certified Document Services (CDS) prepares legal documents for non-lawyers in their own legal actions. CDS offers no legal advice, recommendations, mediation or counseling under any circumstance. CDS are not Lawyers, are not employed by a Lawyer, cannot give any legal advice and our employees are not acting as your Attorney. CDS can give you general factual information pertaining to legal rights, procedures or options available to you in a legal matter when you are not represented by an attorney. CDS cannot give you specific advice, opinions or recommendations about your legal rights, remedies, defenses, or strategies.